First, some personal disclosure: In the late 1980’s, I
worked for a while at Shell Research, developing seismic modeling and data
imaging algorithms. (See
this link.) While there I received training on oil exploration. I
remain awed by the passion, expertise, daring, and discipline of the engineers,
scientists, technicians, and skilled laborers who take responsibility for
providing the hydrocarbons we completely rely on.

Oil exploration is remarkably costly and risky. Even then in
the late 1980’s, it was not uncommon to spend $1B on an exploration well,
hoping to find oil based on the seismic data only to find it dry. At Shell, I was on a team that developed, for the time, a
highly compute-intensive algorithm for imaging seismic data captured in complex
subsurfaces. They literally bought
us a Cray since running the algorithm might make a marginal difference in the
success rate of exploration drilling.

Hence, I am not an oil industry basher, far from it. So I
have been watching the BP, Deepwater Horizon gulf catastrophe with great
interest. In this entry, I will share what I have gleaned from various news
sources. (I have found the Wall Street Coverage very credible). So here is my
net:

Recall, the blowout occurred shortly after capping an
exploration well (a will drilled solely to confirm the presence of a oil
resevior). The depth of the well, reported 18,000 ft, is no big deal. The depth
of the water, 5000 ft, is far from the record of around 8000 ft. So the well itself was routine for
the industry. So what happened?

BP had drilled many of these wells. In fact, ironically the
blowout occurred while BP executives were celebrating their safety record. However,
over the last few years have become profitable by building a very
cost-conscious culture. Such a culture is likely to cut corners, repeatedly
taking small risks in business operations. Such behavior may be rational if you
believe the total liability is bounded. There is reason to believe BP’s
liability is ‘capped’ at $75M. This culture seemed to be at work on the oil
platform:

I bet that BP managers routinely
made the same decisions for years with no adverse outcomes. They were probably
rewarded for this behavior. Such a culture makes such disasters inevitable over
time. A great case study of such
cultures is found in Diane
Vaugh’s The Challenger Launch Decision:
Risky Technology, Culture, and Deviance at NASA. She studies the NASA
culture that led to the decision to launch the shuttle that exploded on launch killing
‘the first teacher in space’ while tens of thousands of school children watched
on television. The managers overruled the engineers who advised them that the
temperature was out of spec for a launch. As she explains, the managers had
gotten away with taking similar risks in the past and had decided to bow to
political pressures and approve the launch.

So what they were thinking is something like, “These risks
are no big deal and the savings matter.”

A key moral is that over time the unlikely becomes
inevitable. Further, experience and past data lead to exactly the wrong
behavior: they reward the risk taking, not the caution. Many have made exactly
the same point about behavior of the financial firms during the financial
meltdown.

Internalizing this moral and acting accordingly is key to
our industry. Increasing, we will be building life critical, economic critical
systems that are very complex, will operate over long periods, and whose
failure could be catastrophic. There is no turning away from this
inevitability. So, we all need to understand that cost savings must be balanced
by a clear understanding of the overall risks of failure, their consequences
and the real return of investment in failure avoidance. This of course takes some math. In
particular, thinking about averages is not useful. That is topic of my next
entry.